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Deferred Payment vs. Prepayment
Definition, Examples, Meaning Explained

 

"Fly Now Pay Later" plans are a "deferred payment" situation for the buyer: Here, the seller delivers services before the customer pays for them. For the seller this is an accrued revenue transaction.

Accrual accounting makes necessary the deferred payment and prepayment concepts. These ideas recognize that every sale includes two events, and these may not occur at the same time.

What are Deferred Payment and Prepayment?

deferred payment situation occurs when the seller delivers goods and services, but then time passes before the customer pays for them. A "fly now, pay later" plan is an example of this situation, as are the so-called "0% financing" plans that some auto dealers use as customer incentives. 

By contrast, the prepayment situation occurs when a buyer pays first and then a significant time passes before the seller delivers delivery of goods and services. Tenants typically pay floor space rental fees, for instance, at or before each occupancy period. Insurance companies typically require premium payment before the coverage period starts. Rental expense and insurance premiums paid this way are thus prepayment situations for the buyer.

Explaining Deferred Payment and Prepayment in Context

Sections below further define and explain deferred payment and prepayment in context with related terms from accrual accounting, including the following:

Accrued Revenue
Accrued Expense
Deferred Payment
Prepayment
Deferred Revenue
Unearned Revenue
Income Statement
Balance Sheet
Accounts Payable Efficiency
Metrics for Accounts Payable
Accounts Payable Turnover
Days Payable Outstanding

 

Contents

Related Topics


 

Does the Deferred Payment Concept Exist in Cash Basis Accounting?

For any company on a cash basis accounting system, however, the bookkeeping practice is much simpler. In cash basis accounting:

  • Expenses are recognized when cash is paid
  • Revenues are recognized when cash is received.

Deferred expenses (prepaid expenses, or deferred charges) along with the other prepayment and deferred payment situations described above, are accrual accounting concepts. These concepts simply do not exist in cash basis accounting.